How Will Bankruptcy Affect Someone Who Cosigned On My Debt?

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Chapter 7 Bankruptcy:

Person Filing Surrenders Property

Grandmother and Granddaughter HuggingFirst of all, keep in mind in order to file a Chapter 7 bankruptcy you must be current on everything unless you are willing to surrender the property.   Let’s consider the following example:  you owe on a debt such as a car loan, but are behind on the payments.  You come in for a free consultation, learn that you may be eligible to file a Chapter 7 bankruptcy, and decide you are going to surrender the property to the creditor since you are behind on payments.  However, someone has cosigned on the debt with you, and you are wondering what that is going to mean for the other person.  He or she (the cosigner) would still be responsible for the full amount that is owed to the creditor.  The creditor will typically sell the property an auction and the cosigner will be responsible for the deficiency balance.

If the debt is an unsecured debt (no property as collateral) then the creditor can go after the cosigner for the full amount owed on the debt.

Person Filing Keeps Making Payments

If the person filing the bankruptcy continues to make payments on the debt, the cosigner should not be impacted most of the time.  However, this means the person filing needs to keep making their regular payments on time, every month, in order to stay current.  If the property is not surrendered in a Chapter 7 bankruptcy, the cosigner should not be affected as long as the person filing is current on the property.

Chapter 13 Bankruptcy:

Person Filing Surrenders Property

If you are filing Chapter 13 bankruptcy and have decided to surrender property, the cosigner will be affected in regards to the debt.  Typically speaking, the creditor will still seek the amount owed from the cosigner and hold them responsible for the debt amount after it has been sold at an auction.  It’s up to the person filing whether or not to let the cosigner know that they are going to be surrendering the property.  However, it’s important to know the cosigner will be responsible for paying back the deficiency balance on the debt.

Person Filing Does Not Surrender Property

In a Chapter 13 bankruptcy, if the person keeps making payments on the property and decides not to surrender it, the cosigner will not be affected most of the time.  Chapter 13 bankruptcy is a repayment plan but as long as the person filing is making payments on the debt, the cosigner should not be impacted. However, there have been rare situations where we have seen someone who has cosigned on a debt with a person who filed a Chapter 13 bankruptcy and on the cosigner’s credit it shows they are one month behind on payments despite the fact that it is being paid within the Chapter 13 bankruptcy plan. Since the Chapter 13 bankruptcy Trustee does not make the full payment each month (they typically pay 1/60th of the amount owed over the course of 60 months) the creditor may report that the cosigner is behind a portion of a payment. This doesn’t happen often but we have seen it before so we wanted to be sure to make you aware of it.

When Will I Know My Bankruptcy is Over?

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Depending on the type of bankruptcy you file, you will wait a certain amount of time for your bankruptcy to end and for your debts to be discharged. Watch our Duncan Law bankruptcy video above for more information.

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These are common questions that many people have about bankruptcy. In an effort to provide you with information we have provided these frequent questions. However, it is important to realize that each state has different rules and these answers are not meant to be legal advice. Contact a bankruptcy attorney to learn more.

What If I Accumulate New Debt in Bankruptcy?

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Father and Daughter Surfing the WebBankruptcy usually includes all debts that are accumulated before the bankruptcy petition is filed with the court. If there are new debts that are incurred after you file for a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, these are known as post-petition debts and cannot be included in your current bankruptcy.

However, if you were to file another bankruptcy later, the new debts could be included in that petition. There are ways that you can amend your petition to add a creditor after the petition has been filed, but you must be able to prove that this debt was accumulated before the petition was filed.

While in a Chapter 13 bankruptcy, you must get permission from the court in order to incur new debt. This is done through a Motion to Incur Debt. You would need to file the motion to incur debt for anything from obtaining a new credit card to buying a new house. Say you were to get a new credit card while in a Chapter 13 and not tell the Trustee about it. The bankruptcy Trustee could find out and you obtaining debt without the court’s permission could cause problems. This could even possibly cause your bankruptcy to be dismissed! If your bankruptcy is kicked out or dismissed you would be responsible for that new debt as well for the debt that was originally included in the bankruptcy. So, be smart and make sure to ask your attorney what you need to do if you believe you left someone off of your bankruptcy.

The bottom line is you typically will not be able to include post-petition debts (debts incurred after your bankruptcy has been filed) in your bankruptcy.

What is a Motion for Relief from Automatic Stay?

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A motion for relief from automatic stay is filed by one of your creditors after the bankruptcy has been filed. It is the legal process of the creditor requesting the court’s permission to proceed with legal action against you. This is filed by secured creditors such as a mortgage company or auto finance company, if you are not making payments to the Chapter 13 bankruptcy Trustee in a Chapter 13 bankruptcy.

What if I Get Behind on My Car Payment During Bankruptcy?

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If you get behind on your car payment while in Chapter 7 bankruptcy, the finance company may file a Motion for Relief from Automatic Stay requesting that the bankruptcy court allow the finance company to repossess the car. In most Chapter 13 bankruptcy cases, your car payments will be included in your payments to the Chapter 13 bankruptcy Trustee if you are purchasing the vehicle. If you are leasing the vehicle, you will make lease payments directly to the finance company. If you get behind in your payments to the Chapter 13 bankruptcy Trustee or to the finance company for leases, the finance company may file a Motion for Relief from Automatic Stay requesting that the bankruptcy court allow them to repossess the car.

What if I Get Behind in My Mortgage Payment While in Bankruptcy?

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We understand that sometimes after filing bankruptcy different situations come up that may cause you to fall behind on your mortgage payment. It’s important to realize there are a number of consequences that come from falling behind on your bankruptcy. We will look at them depending on which type of bankruptcy you file, a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.

Chapter 7 Bankruptcy:

In a Chapter 7 bankruptcy, one must be current on their mortgage payment at the time of filing and throughout the duration of the bankruptcy in order to keep the house. If you were to fall behind on your mortgage payments there would be two important time periods to consider. In other words, you need to know where you stand in the bankruptcy.

Before the Final Decree (End of Bankruptcy):

If you fall behind on your payment before the bank has received the final decree, the mortgage company could potentially take legal action.  The mortgage company may choose to file a Motion for Relief from Automatic Stay.  In other words, they would be asking the court for permission to begin foreclosure proceedings on the home.  The Motion for Relief from Automatic Stay will likely be granted to the mortgage company unless you are able to bring the payments current by the hearing date.

After the Final Decree (End of Bankruptcy): 

If you fall behind on your payment after the Final Decree, then it’s the same as if you haven’t filed bankruptcy.  The mortgage company no longer has to ask for permission from the court to begin foreclosure since your bankruptcy is over once the Final Decree is entered.  Therefore, the mortgage company would decide when they wanted to begin foreclosure proceedings on the home.

Prevention:

Be aware of when your mortgage payments are due each month and make a valuable effort to make sure they get to your mortgage company on time. It is common in Chapter 7 bankruptcy for the mortgage company to stop sending statements and/or to stop automatic drafts. You should keep an eye on your automatic drafts to be sure your payments are being made on time. Be sure you pay the mortgage payment on time every month, even if you do not receive a bill or a statement.

Chapter 13 Bankruptcy:

What’s important to consider in a Chapter 13 is at what point in the bankruptcy you have fallen behind on your payment.

Not Behind at the Time of Filing Bankruptcy

If you are not behind at the time your Chapter 13 bankruptcy is filed, the mortgage payment will not be included in your monthly payment to the Trustee.  This is considered “paying outside of the plan” since it will continue to be paid as a separate payment.  You will continue to make a separate payment to the mortgage company only if you are current at the time of filing and throughout the duration of the bankruptcy.

Behind at the Time of Filing Bankruptcy

One reason why people choose to file a Chapter 13 bankruptcy is because they are behind on their mortgage payments and need to get caught up.  If you are behind on your mortgage payment at the time of filing, it will be included in your Chapter 13 monthly payment to the bankruptcy Trustee.

Not Behind at the Time of Filing But Later Fall Behind

If you are not behind on your mortgage payment at the time of filing but then fall behind during the bankruptcy, your Chapter 13 monthly payment will increase.  The mortgage company is a secured debt and must receive a monthly payment. Therefore if you fall behind it then needs to be included in your Chapter 13 monthly payments.  Your monthly payment to the Trustee will increase, because the mortgage company is one of the first creditors to receive payment. The Chapter 13 office will request that the mortgage company be added to your monthly payment, which will increase as a result.

Prevention:

If you are making your mortgage payments “outside of the plan,” or in other words, making separate payments to the mortgage company, be aware of when they are due and be sure the mortgage company receives your payments on time. As we discussed in the Chapter 7 section, it is common for billing statements and/or automatic drafts to be stopped during bankruptcy, so be sure you pay the mortgage payments on time, regardless of whether you receive statements.

Will My Employer Find Out About My Bankruptcy?

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Duncan Law was founded by Terry Duncan in Charlotte, North Carolina, in 1996. At that time Terry decided to create a law firm that was dedicated to helping those who are facing tough times. In 2009, Damon Duncan and Melissa Duncan joined the firm in the Greensboro, North Carolina office. Together, this family is here to serve you. We know that too often bad things happen to good people. We are here to help.

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What If My Mortgage Company Refuses Payment?

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Your mortgage company has most likely refused your payment because the mortgage company has received notice of the automatic stay that goes into effect as soon as your bankruptcy is filed. They are probably concerned that they will be in violation of this “stay” if they agree to accept a mortgage payment. A lot of the time this can be cleared up with a simple phone call. If they send the payment back, try sending it again certified mail and keep copies of your receipts. This will help prove that you have been trying to make the payments if needed.

You can always contact you bankruptcy attorney’s office. Usually they will contact the mortgage company for you and make it so that they will begin to accept your payments again.  Most importantly, if the mortgage company does not accept your payment, do not go and spend that money! You will eventually pay that mortgage payment and the fact that they did not accept it when you tried to make the payment is not a sufficient excuse to no longer have the payment. Put the money that would be going to the mortgage company in your bank account and leave it there until you have cleared up the misunderstanding with the mortgage company.

How to Pay Attorney's Fees for Bankruptcy

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We also understand that because times are tough, funds are limited. That’s why we set up an Easy Payment Plan with all of our clients for your attorney fees. Through our Easy Payment Plan, YOU set the payment schedule for your attorney fees based on your income and how often you get paid. After you have paid the attorney fees, federal court filing fee, completed and paid the credit counseling fee, submitted the proper paperwork and met with an attorney at Duncan Law, your case will be filed with the Court and you can begin your new financial life.

What to Bring to My Free Bankruptcy Consultation

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Thank you for your interest in our firm. We know the decision to pursue bankruptcy was not easy for you. Our goal is to make the process as simple as possible for you and your family. We also want your free consultation to be helpful to you. As a result, we have a list of items for you to bring to your free consultation. Although you are not required to bring every document below, the more information you are able to bring to your consultation, the more precise we can be in determining your eligibility for bankruptcy.